Thursday, June 17, 2010

How central bank independence works

Technocrats are charged with setting monetary policy to hit the inflation target on the basis of objective assessments of the economic situation, without political interference.

Central bankers will never intervene in political debate to favour one party over another.... unless that party gives them a huge slice of extra power in exchange for rubbishing the outgoing government and backing the incoming government's plans.

Mervyn King is a very clever man, but failed to take any action to prevent a colossal housing bubble lead to the worst collapse in output since the Great Depression. The unsustainable boom should have set alarm bells ringing in Threadneedle Street from 2002 on, but Mervyn (save a quickly forgotten statement in summer 2004) said nothing. The Conservatives then saved his skin by blaming everything on the FSA.

Just like Alan Greenspan, whose concerns about the low level of US public debt (yes, you read correctly) in the early 2000s gave political cover to GW Bush's ridiculous plutocratic tax cuts, Mervyn has served the interests of the powerful, and gets his reward.

Now Mervyn comes out for fiscal tightening even though we have no certainty this will not increase unemployment and make the deficit worse. Bond yields are low, the deficit is projected at £15 billion less than a couple of months ago, but we still need to fire tens if not hundreds of thousands of public sector workers.

Well, at least one government employee's job is safe.